Tuesday, October 19, 2010

Are Microloans Bad for Growth?

Micro-finance, starting with the Grameen Bank in Bangladesh, have very successfully overcome information and collateral problems in very poor areas. This access to credit, and many anecdotal stories of such credit allowing recipients to escape poverty, have made micro-finance institutions the darling of the development NGOs. Now there is a new breed of for-profit micro-finance institutions as well as peer-to-peer lending organizations like Kiva. In fact, here is a Kiva promotional picture that is a perfect example: a loan to buy a sewing machine. Such an investment raises personal productivity a little and may help generate income above the poverty level, but such investment might also be in lieu of going to school.

Whether these microloans are effective poverty alleviation programs is still a hotly debated question, thought the balance of the evidence seems to be that they do increase consumption of recipient households. My new colleague at OSU, Elizabeth Schroeder, has a very important paper that finds significant effects.

Now the trade off I illustrate with the Kiva picture might still be the right one to make - after all school is no help if you are starving - but it is important to understand the implications. Our paper is, therefore, a cautionary tale not a condemnation.

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